Selling your business can seem like a daunting task. The good news is that companies are sold every day, and you have the potential to sell your company as well.
In this article, we are going to discuss the starting point for selling your business.
Is your business sellable? Businesses are not like selling a house. Unfortunately, there really isn’t a “We Buy Ugly Businesses” process to selling a business, so there are two types of businesses that cannot be sold:
Is it a Job or a Business?
Many small business owners are more solopreneur rather than an actual business. Business is about a team that is working towards a goal and along the way produces a profit.
A solopreneur is a nice way to say that you have a job. The reason it is considered merely a job is that you are the one that is responsible for doing everything. There wouldn’t be a business if you died. While many small business owners are often the critical aspect of the business, a sellable business has employees that perform task so that the owner can do other items.
Track Record of Profit
Profit is a scary word. That being said, 99.9% of every business that is sellable has some form of profitability in its history. I am not suggesting here that you are showing a profit on your tax return. But if you sell the company and exit, the person or entity that purchases your company must be able to realize an ROI. There are many ways that you can document this profit; it may be money that a w2 salary or a personal bill that is paid by the company. These items may be able to be “recaptured” and considered profit. To have a sellable company, you must have a track record of success that can be measured to sell the business.
If you’re considering selling your business, it’s important to remember that prospective buyers are looking for bright, objective facts that will convince them that your business will be a profitable investment for them.
Medium Range Picture
One of the first barometers for selling your business is to see what the business is worth. To determine the correct value, it is essential, to have a professional business valuation performed. While many companies provide a fee-based valuation, I recommend locating a reputable business broker or Mergers & Acquisition firm. This firm must understand the principles of business valuations and be able to provide you with a no cost no obligation factual written report. This report (if based on factual information) helps you understand if the value will meet your expectations as well as identify areas that you can improve to increase the value. Be cautious of a business broker that gives you an unusually high number that is not backed by fact. One unethical tactic for business brokers is to promise blue sky with the goal of getting you to accept a lower price later in the process.
A reputable business valuation that is built on fact will examine the following documents:
- Profit & loss statements for the current and past 2-3 years
- Current balance sheet
- Business tax returns for the past 2-3 years
Once they receive these items from you, they are looking at other businesses that have sold in your industry and geographic location to determine an acceptable ROI that business purchaser is expecting to achieve in your specific industry.
If your business is successful there is no doubt that you have successful systems and process that you and your employees follow. Take some time to examine them and, if appropriate, document them. This documentation is the standard operating procedure for every aspect of your business. When you record these systems, it will give the business purchaser the confidence that they will be able to understand how to operate the business successfully in the future.
Preparing solid financials is vital to achieving the highest value for your business. Anyone looking to purchase a company wants to achieve a Return On Investment. Your past financials are a key indicator of what an investor can expect if they purchase your business. This task is not a hard task. Companies are really about money in and money out. Therefore, make sure your revenue is accounted for and documented clearly. Then just make sure that you have the accurate expenses allocated for when you spent the money. When going thru this process, it is helpful to identify one-time expenses, personal expenses and anything that the business purchaser wouldn’t expect to pay in the future.
Legal & Contracts
When starting the process of selling your business it is necessary to review all relevant contracts that you and the company are a party. These include your businesses leases, Customer agreements, Vendor terms, and employee agreements. Talk to an attorney or even a qualified business broker to discuss your legal situation. Often several items need to be addressed before going to market to sell the business.
Since business purchaser is concerned about ROI another area that becomes a concern is customer stability and concentration. When your business has one customer that is over 30% of your overall revenue, then it can affect your value. Therefore it can be necessary to diversify your client base.
When selling your business, it can seem like a daunting task. The good news is that you can sell your business. Many qualified business brokers and Mergers and Acquisitions firms can help you in the process. When you pay close attention to this process, it will pay off in a major when the process of actually selling the company comes along. Try to focus some time every day to begin working thru these items. You will not regret the work when you are relaxing on a beach or skiing down a mountain after the successful sale of your business.
Scot Cockroft is a serial entrepreneur and business broker who helps business owners realize their full potential in selling their business. He is passionate about the process, having created and sold four of his own businesses to date, and helped hundreds of other businesses do the same. As President of Sigma Mergers & Acquisitions , Scot is in the trenches day-to-day and is always looking for the next business to buy, grow, and of course sell! Scot is also working on his first book, The No B.S. Guide to Profiting From Selling Your Business.